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Why I’d rate a Stocks and Shares ISA ahead of a Cash ISA, especially now

The coronavirus pandemic is sending the world’s stockmarkets crashing. The FTSE 100 is plummeting to levels not seen since 2016. And you might not be thinking about a Stocks and Shares ISA, or a Cash ISA, right now.

But there’s a new year’s allowance coming our way in just a few weeks, and I think it would be a mistake to ignore it.

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But maybe you’re thinking about an ISA, but don’t like the way stocks and shares are going? If so, you might be drawn towards a Cash ISA this year, instead. But I think that would be the second mistake.

Cash ISA

Interest rates on an easy access Cash ISA are currently topping out at around 1.3% per year. That’s not a lot. And it gets worse when we compare it with inflation. The most recent inflation figures (for January) show prices in the UK are rising at a rate of 1.8% year-on-year.

That’s 0.5% ahead of that Cash ISA rate. If you put £1,000 into one today, you’ll be able to take out £1,013 in a year’s time. But if you try to spend it, what would cost £1,000 today will have risen to £1,018. In real terms, you’ll have lost money. How can that possibly be thought of as an investment?

And it’s surely going to get worse. As an economic stimulus in response to the coronavirus threat, the Bank of England has cut interest rates from 0.75% to 0.25%. That’s sure to feed through to even lower Cash ISA rates.

You can get a little bit more if you’re prepared to lock your money up for a fixed number of years. But that would remove the only possible advantage of a Cash ISA, the ability to get your money out quickly. You can actually get money out of a Stocks and Shares ISA reasonably speedily, with no financial penalties.

Terrible investment

I can only conclude a Cash ISA is a worse investment than not having an ISA at all. But what’s the argument for a Stocks and Shares ISA today, while share prices are crashing?

It’s all about investing being a long-term endeavour, and something that can smooth out the short-term ups and downs. Right now, the value of my shares has fallen. By how much, I haven’t checked, because I don’t worry about things like that.

But my investment portfolio is providing me with dividend income amounting to around 5% per year. That’s based on my purchase prices, so anyone buying the same shares today could lock in an even better yield. And that’s the key right now. The next few months could be one of the best times we’ve had in years for investing in a Stocks and Shares ISA.

Stocks & Shares ISA

I have no intention of selling any time within the next decade. But by the time I do sell, the coronavirus will have gone, share prices will surely have recovered, and I expect the current slump will be hard to see on the long-term chart. And, you know what? We may well have been through other crises as yet undreamed of.

And all the time, I’ll have been taking my 5% per year from dividends, beating inflation and beating the interest on a Cash ISA. Any long-term share price gains will be a bonus.

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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.